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We have been following the covered calls record of one of our members. In August 2020, she committed about $500,000 to buy Novavax (NVAX) shares at over $174 per share because the premiums on covered calls were attractive! That was the peak price! In short order, she lost $232,407.50 on the security itself.
By selling just out-of-the-money covered calls on NVAX every Monday after that, with expiry date on Friday of the same week, she brought her losses from $232,407.50 down to $50,364.45 by Monday, December 21, 2020.
When the market opened yesterday at 9:30 AM today, she planned to sell 24 contracts of NVAX out of the money, strike price $135, expiry date, December 31. (NVAX C 31DEC20 135.00) That would have allowed for five dollars of growth if there was to be any. NVAX has been trending upwards and the trend is your friend (until it isn’t).
At market close last Friday, the bid/ask range on NVAX C 31DEC20 $135.00 was $4.85/$5.55 with the largest volume and open interest of any out-of-the-money contracts. Based on that, she expected to get $12,480.00 ($5.20, which is halfway between $4.85 and $5.55, multiplied by 2,400). That would have brought her losses down to $37,884.45 ($50,364.45 minus $12,480.00) if there was no growth above $135.00 by Friday, December 31, and if there were no losses on the security itself.
If the hoped-for five-dollar growth took place, she would have gained an additional$12,000. That would have brought her losses down to $25,884.45 ($37,884.45 minus $12,000).
By the time she entered the market at 9:40, the above figures had changed.
For the worse!
She entered a sell order on 24 NVAX covered call contracts at the market, strike price $130.00, expiry date this coming Friday, December 31 (C 31DEC20 130.00). It was filled at $3.29 per share for total of $10,600.00.
That was the lowest premium on NVAX covered calls in recent memory. When she wrote just out-of-the-money covered calls on NVAX on December 14, she got a premium of $7.95 per share!
As it is, her losses are down to $27,284.45 ($37,884.45 minus $10,600.00).
Looking at this from another perspective, a $10,600.00 return on $312,000.00 (2,400 times $130.00) works out to 3.40%.
To annualize that, multiply the figure by 52!
Historically, over the long term, passive investing has been the best way for growing savings and is are likely to remain so for many years. Investors can do that by buying an exchange-traded fund that tracks the S&P 500. The Monday Morning program encourages that evidence-based approach to investing.
What you see above is NOT passive investing, however, many of our members are interested, so we write about that once in a while. Stockbrokers love it.
To review yesterday’s wisdoms:
“Investing should be like watching grass grow or paint dry.” Nobel laureate economist Paul Samuelson.
“Invested money is like a bar of soap. The more you handle it the less you have.” Nobel laureate economist Eugene Fama.
“The Stock Market is designed to transfer money from the Active to the Patient.” Warren Buffett, one of history’s greatest investors.
“Passive investing consistently outperforms active investing over the long run.” The Monday Morning program.
We have designed the Monday Morning Millionaire Program to offer abstracted investment education. Over the last two decades, the program has outperformed over 90% of portfolios, including professionally managed ones.
The program does not provide any investment advice or endorsements.
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